Blum v. Commissioner
2013 U.S. App. LEXIS 25080
| 10th Cir. | 2013Background
- Blum engaged in OPIS, an offshore tax shelter designed to create large artificial losses to offset gains from an $45 million sale of Buy.com stock.
- OPIS was disallowed by IRS under the economic substance doctrine in 2001; IRS later issued deficiency and penalties for 1998-1999 returns.
- Blum challenged in Tax Court; Tax Court upheld disallowance and penalties.
- Blum previously relied on KPMG for tax advice; KPMG advised on OPIS and provided an engagement letter for advisory fees.
- IRS issued a 2005 deficiency notice; Blum sought relief but Tax Court affirmed, and Blum appealed to the circuit court.
- Blum also faced a civil suit against KPMG in California; collateral estoppel issues arose but are not before this court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Economic substance proper test applied | Blum argues unitary pre-1998 standard remained valid | IRS/Senate/Tenth Circuit test uses two-prong analysis (subjective motivation and lack of economic substance) | Economic-substance test correctly applied; two-prong framework affirmed |
| Gross valuation misstatement penalty applicability | Penalty should not apply where underlying transaction invalidated by substance doctrine | Supreme Court favors applying penalty despite economic-substance invalidation | Penalty affirmed; Woods decision cited to support majority view (penalty applicable) |
| Negligent underpayment penalty and reliance on advice | Blum relied in good faith on KPMG advice | KPMG not independent; misrepresentations undermine reasonable cause defense | Penalty upheld; reliance on KPMG not reasonable cause due to non-independence and misrepresentations |
| Collateral estoppel impact on related civil claims | Not before the court; court declines to rule on collateral estoppel impact in civil case |
Key Cases Cited
- Sala v. United States, 613 F.3d 1249 (10th Cir. 2010) (economic-substance framework; two-prong analysis guidance)
- Keeler v. Comm’r, 243 F.3d 1212 (10th Cir. 2001) (links tax advantages to actual losses; economic-substance standard evolution)
- Jackson v. Comm’r, 966 F.2d 598 (10th Cir. 1992) (two-prong framework with subjective motivation and economic substance)
- James v. Comm’r, 899 F.2d 905 (10th Cir. 1990) (two factors as precise considerations within economic-substance analysis)
- Casebeer v. Comm’r, 909 F.2d 1360 (9th Cir. 1990) (transaction lacking economic substance if no profit potential)
- Stobie Creek Invs., LLC v. United States, 608 F.3d 1366 (Fed. Cir. 2010) (profit potential and non-tax benefits considered in economic-substance analysis)
- Dow Chem. Co. v. United States, 435 F.3d 594 (6th Cir. 2006) (timing and structure of transactions relevant to economic substance)
- WFC Holdings Corp. v. United States, 728 F.3d 736 (8th Cir. 2013) (supports consideration of lack of substantive profit in substance doctrine)
- Crispin v. Comm’r, 708 F.3d 507 (3d Cir. 2013) (no reasonable reliance where misrepresentations by tax advisor)
- 106 Ltd. v. Comm’r, 684 F.3d 84 (D.C. Cir. 2012) (reasonable cause defense analysis in penalties)
- Superior Trading, LLC v. Comm’r, 728 F.3d 676 (7th Cir. 2013) (majority view on Section 6662 penalties for basis overstatements)